Exchanges looking to thrive as the focus of competition shifts from trading and latency might do well to take some inspiration from Poland, according to Izabela Olszewska, head of business development, Warsaw Stock Exchange (WSE).
Competition between Europe’s equity exchanges over listings has risen in recent months. In June, Eurotunnel announced that it would transfer its listing from the London Stock Exchange (LSE) to become the first issue on NYSE Euronext's London-based venue – raising the prospect that exchanges could lose out if investors are not satisfied with listings arrangements.
Poland’s only exchange boasted the highest number of IPOs of any European exchange in Q2 this year, with 33 IPOs – well ahead of the 21 recorded by the LSE, 12 on Deutsche Börse and just one on SIX Swiss Exchange. The WSE‘s dedicated platform for small and medium enterprises (SMEs), NewConnect achieved 28 IPOs in Q2 this year, representing 41% of all IPOs on European markets during that period.
The upcoming MiFID II legislation in Europe contains an SME Growth Markets category, which aims to boost access to capital markets for SMEs by providing a more transparency environment that will attract a wider range of investors.
Listing strengths
According to Olszewska, there are three main components to the extensive Polish IPO pipeline. The first is a long-term privatisation drive by the Polish government. The second is a strong focus on providing services domestic SMEs. The third source is listings from foreign countries, especially in central and eastern European neighbour states such as Ukraine.
“Listing in Poland has significant advantages for foreign companies,” said Olszewska. “As the biggest central and eastern European (CEE) nation, issuers will gain greater visibility and credibility by listing in Poland. We are already competing with the champions in terms of value of IPOs – we were third in Europe by value this quarter.”
Olszewska points out that local knowledge and familiarity with the CEE region, combined with a welcoming atmosphere for foreign issuers, ensures that firms from the region can list in Warsaw with confidence.
“Foreign companies gain an access to the wide base of investors on the Polish market, including a group of local pension funds which have legal limits for their investments abroad," she said. "Ukrainian companies get an additional value in form of publishing by the Warsaw Stock Exchange a special index WIG-Ukraine. We are trying to offer on the Polish market the best opportunities of raising capital and listing on the Warsaw Stock Exchange at a competitive cost.”
Competing interests
Some market observers have expressed concerns that many exchanges in long-established western markets are more interested in chasing lucrative high-frequency trading (HFT) flows than providing services for issuers and long-term investors. But the WSE insists that it is not likely to follow that path any time soon. While the Polish exchange is working hard to modernise its technology by adopting the Universal Trading Platform provided by NYSE Technologies, opening co-location facilities, and adding remote client clearing, Olszewska believes that helping the ‘real economy’ remains the true focus of the exchange’s activities.
“We help firms raise capital and provide an environment where investors can find good quality companies," she said. "High-frequency traders are good, but we recognise that we need a healthy balance of participants. It would be a mistake to follow only one segment of the market. With the implementation of UTP in Warsaw we hope to encourage new categories of investors which are not present currently on our market.”
According to Ruben Lee, CEO at financial research company Oxford Finance Group, fostering both HFT and listings activity are not necessarily mutually exclusive activities for an exchange.
“There is no trade-off between HFT and providing listing services,” he said. “More IPOs mean more assets to trade, which means more HFT will be attracted to the exchange. Conversely, when there is more HFT, spreads tend to narrow, creating more incentive to list and better prices for issuers.”
Meanwhile, Herbie Skeete, CEO at exchange information provider Mondo Visione, suggested that increased competition between Europe’s cash equities exchanges may provide the stimulus needed to ensure that listings services continue to cater for the needs of institutional investors interested in company fundamentals and long-term trends.
“The cash exchanges are no longer the kings – instead, that position is held by the derivatives exchanges,” he said. “They may be out to make money, but they know they must keep users happy and offer listings support, because if they don’t, their competitors will benefit, as the defection of the Eurotunnel listing proved so dramatically.”
In the US, Kraft Foods moved its listing from NYSE Euronext to rival Nasdaq OMX last month. In addition, US exchange operator BATS Global Markets had intended to offer listings competition, but withdrew its initial IPO after a technical failure. The US IPO market suffered further in the aftermath of the bugged IPO of Facebook, which resulted in demands for compensation by angry investors. However, news that guitar maker Fender Musical Instruments, network-security firm Palo Alto Networks and travel website Kayak Software all intend to pursue an IPO in the next few weeks has revived hopes that market confidence may return.